2. In this matter, assessment was completed u/s. 143(3) of the Act on 24-03-2006 and Assessing Officer (AO) made addition on account of (i) unutilised Modvat Credit, (ii) depreciation on motor car (iii) expenditure incurred on Research and Development (iv) transfer price adjustment. During the appellate proceedings, CIT(A) upheld the additions made by the AO. Assessee preferred an appeal before the ITAT against the order of the CIT(A). Tribunal vide its Order (ITA No. 1227/Mum/2007) dt. 27-10-2010 deleted the addition made on account of depreciation of motor car. Matter regarding Modvat Credit was restored back to the file of AO.

3. Meanwhile the AO initiated proceedings u/s. 271(1)(c) of the Act in respect of the additions/disallowances i.e. item Nos. (i) to (iv) mentioned at paragraph 2. After considering the submissions of the assessee, AO levied the minimum penalty amount to Rs. 65,99,167/- for furnishing inaccurate particulars. In this regard, AO held as under:

“The assessee has made claims as the allowable claims by hiding the merits and the bonafides of the case and thereby shown less income for the relevant year under consideration and offered the same for taxation. Thus, the assessee has made non-bona fide claims and thereby filed inaccurate particulars of income and also concealed the particulars of its income and therefore is liable for penalty u/s. 271(1)(c) and therefore penalty u/s. 271(1)(c) is leviable on a quantum of Rs. 1,79,56,918/- …….it is crystal clear that in this case, the assessee has not been able to substantiate the explanation offered by it before the assessing officer and CIT(A) in respect of addition/disallowances… And, thus, the penalty under section 271(1)(c) is levied on the quantum of Rs. 1,79,56,918/- ……. Looking into the facts and circumstances of the case, the minimum penalty under section of Rs. 65,99,167/- is hereby levied, accordingly.”.

4. CIT(A) confirmed the penalty order on account of un-utilised Modvat Credit, depreciation on motor car and expenditure incurred on Research and Development. He deleted the penalty for transfer pricing adjustment.

5. Before us, Authorised Representative (AR) argued that the issue regarding depreciation had been decided in favour of the assessee by the Tribunal. So, penalty should be dropped with regard to motor car depreciation. Regarding Modvat, he submitted that assessee had made full disclosure, that issue was debatable. He referred to pg. 57 and pg. 107 of the paper book in his support. Regarding the R&D expenditure, AR submitted that full disclosure in form of Tax Audit Report and audited accounts were made by the assessee. He referred to pg. 58, 112,118,124-126, 162-63 of the Paper Book and submitted that necessary details were filed before the AO, that penalty levied u/s. 271(1)(c) should be cancelled. He relied upon the cases of CIT v. Reliance Petro Product (P.) Ltd. [2010] 322 ITR 158/189 Taxman 322 (SC), Addl. CIT v. Jay Engg. Works Ltd. [1978] 113 ITR 389 (Delhi) and Sree Krishna Electricals v. State of Tamil Nadu [2009] 23 VST 249 (SC). Departmental Representative (DR) on the other hand supported the Orders of the AO and the CIT(A). He submitted that assessee did not file any evidence about R&D expenditure in spite of many opportunities, that details of payments made by cheques/cash were not filed at any stage. He relied upon judgment of the Hon’ble Delhi High Court in CIT v. Zoom Communication (P.) Ltd. [2010] 327 ITR 510/191 Taxman 179.

6. We have heard the rival submissions. As far as addition on account of depreciation on motor car is concerned, issue has already been decided in favour of the assessee by the ITAT in quantum appeal. Once addition itself has been deleted, there is no justification for imposing penalty. As the matter regarding Modvat has been sent back to the file or the AO by the Tribunal, so we are of the opinion that is a debatable issue. Penalty u/s. 271(1)(c) cannot be imposed for debatable issues. Hence, penalty imposed for unutilised Modvat Credit is also deleted.

7. It leaves us with the R&D expenditure. From the facts available on the file, it transpires that during the assessment proceedings AO had called for the details addition/deletion of fixed assets with date of purchase, cost of assets, date of installation along with supporting documents. Assessee produced only three bills and AO found that even those bills were not evidencing the claim made by the appellant. AO gave more than one chance to the assessee to prove his claim, but assessee did not avail the same for the reasons best known to him. In these circumstances AO levied penalty u/s 271(1)(c) of the Act.

8. Now, we would like to discuss the cases relied upon by the AR. In the case of Reliance Petro Product (P.) Ltd., Hon’ble SC has held as under:

“A glance at the provisions of section 271(1)(c) of the Income-tax Act, 1961, suggests that in order to be covered by it, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word “particulars” used in section 271(1)(c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous. Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars.”

Hon’ble SC mentioned facts about the case as under:

“The assessee is a company and the relevant assessment year is 2001-02. The return was filed on January 31, 2001, declaring loss of Rs. 26,54,554/-. This assessment was finalized under section 143(3) of the Act on November 25, 2003, whereby the total income was determined at Rs. 2,22,688/-. In this assessment the addition in respect of interest expenditure was made. Simultaneously penalty proceedings under section 271(1)(c) of the Act were also initiated on account of concealment of income/furnishing of inaccurate particulars of income. The said expenditure was claimed by the assessee on the basis of expenditure made for paying the interest on the loans incurred by it by which amount the assessee purchased some IPL shares by way of its business policies. However, admittedly, the assessee did not earn any income by way of dividend from those shares. The company in its return claimed disallowance of the amount of expenditure for Rs. 28,77,242/- under section 14A of the Act.

By way of response to the show-cause notice regarding the penalty in its reply dated March 22, 2006, the assessee claimed that all the details given in the return were correct, there was no concealment of income, nor were any inaccurate particulars of such income furnished. It was pointed out that the disallowance made by the assessing authority in the assessment order under section 143(3) of the Act was solely on account of different views taken on the same set of facts and, therefore, they could, at the most, be termed as difference of opinion but nothing to do with the concealment of income or furnishing of inaccurate particulars of such income. It was claimed that mere disallowance of the claim in the assessment proceedings could not be the sole basis for levying penalty under section 271(1)(c) of the Act. It was submitted specifically that it was an investment company and in its own case for the assessment year 2000-01 the Commissioner (Appeals) had deleted the disallowance of interest made by the Assessing Officer and the Tribunal has also confirmed the stand of the Commissioner (Appeals) for that year and, therefore, it was on the basis of this that the expenditure was claimed. It was further submitted that making a claim which is rejected would not make the assessee-company liable under section 271(1)(c) of the Act”.

If the facts of the case under consideration are compared with the facts of Reliance Petro Product Pvt. Ltd. (supra) it can safely be said that they are totally different and distinguishable. Here, a claim was made for which no evidence was produced, where as in the case of Reliance Petro Product (P.) Ltd. (supra) a claim u/s. 36 was made and the AO was of the opinion that said claim was not permissible.

8.1 Facts of the case Sree Krishna Electricals’ case (supra) were referred to by the Hon’ble SC in para 13 of the Order of Reliance Petro Product’s case (supra). In the case of Sree Krishna Electricals’ case (supra), decided with reference to Sales Tax Act, it was found that items that were not included in the turnover of the assessee were available in the appellant’s account-books. Hon’ble SC decided the matter in the following words:

“Where certain items which are not included in the turnover are disclosed in the dealer’s own account books and the assessing authorities include these items in the dealers turnover disallowing the exemption penalty cannot be imposed”.

8.2 In the matter of Jay Engg. Works Ltd.’s case (supra), Hon’ble Delhi High Court had decided the issue as whether the report of the auditors can be considered immaterial for the assessment in the absence of account books destroyed by fire? After discussing the provisions of Sec. 34 of the Evidence Act and Sec. 142(1) and 143(3) of the IT Act, 1961, the Hon’ble HC held:

“The question arises, therefore, whether the reports of the auditors could be said to be “material” on which reliance could be placed by the income-tax authorities. Unlike the proof required of such reports as also of the account books under the Indian Evidence Act, it is quite competent for the income tax authorities not only to accept the auditors’ report, but also to draw the proper inference from the same. The income tax authorities could, therefore, come to the conclusion that since the auditors were required by the status to find out if the deductions claimed by the assessee in their balance sheets and profit and loss accounts were supported by the relevant entries in their account books, the auditors must have done so and must have found that the account books supported the claims for deductions, when the deductions were disallowed, by the Income Tax Officer on the ground that details information regarding them was not available, justice was not done to the assessees. It was not possible for the assessee to produce the original account books, which were destroyed in fire. There was however, other material mainly consisting of the auditors’ reports from which it could be inferred that the deductions were properly supported by the relevant entries in the account books”.

In our humble opinion, case of Jay Engg. Works Ltd.’s case (supra) is about alternative material for assessment. In that case, account books were destroyed by the fire and it was impossible for the assessee to produce the same. Law never expects impossible to be performed. Here, assessee never had raised the issue of destruction of the evidences that could support the claim made by him. Neither before the AO nor before the CIT or ITAT, assessee had argued that evidences were destroyed. Not only in quantum proceeding even in the appellate proceedings said argument was not advanced any time. Besides, we have to decide the issue regarding penalty imposed u/s. 271(1)(c) of the Act. Assessment and penalty proceedings are different. During penal proceedings, assessee was issued a notice asking him why penalty should not be levied. After considering explanation filed by the assessee, AO reached at the conclusion that assessee had made ‘non-bonafide claim’. In Jay Engg. Works Ltd.’s case (supra), issue was not about imposition of penalty.

9. We do not agree with the submission made by the AR that Audit Reports and minutes of meeting of Board of Directors were enough to prove the genuineness of the transactions in the case under consideration. There is no doubt that Tax Audit Report is an important document, but it cannot take place of the evidences required for claiming a deduction. Deductions claimed u/s. 30-37 of the Act have to be proved by the assessee with proof. As per the established principles of taxation jurisprudence if any claim resulting in loss to Revenue is made by an assessee without supporting evidence, he exposes himself to penalty u/s. 271(1)(c). Tax Audit Report cannot perform the duties assigned to the AOs by the Act. If claims made by the assessees are to be decided only on the basis of the Tax Audit Reports, as argued by the AR, then institution of AO will be redundant. As per Section 142, AO is empowered to require a person to produce or cause to be produced such documents or accounts that AO require for making an assessment. He can conduct “necessary inquiry” for obtaining ‘full information’ in respect of the income or loss of a person. Under Section 143(3), the AO is empowered to pass an Order allowing or rejecting the claim made by the assessee. Assessee is also entitled to produce particulars during the assessment proceedings. As early as 26-09-2005, AO directed the assessee to furnish full details of fixed assets with supporting documents. Till the finalisation of assessment on 24-03-2006, assessee did not produce document required by the AO except three bills. AO’s observations on pg. 19 of his order clearly establish the fact that assessee did not produce details in support of the claim that was made in the return of income. AO held as under:

“……explanation of the assessee has been gone through and the same is not accepted as spite of giving sufficient opportunities to the assessee to file the details on number of occasions and also after giving final opportunity to the assessee on 20.03.2006, the assessee so far, could not file or produce the proof in respect of the aforesaid addition. At that time of hearing on 14.03.2006, the assessee was informed that in case details of additions along with copies of the bills is not filed the same shall be disallowed. ….Under the income tax act, 1961, the onus is on the assessee to justify his claim for deduction/allowances by producing sufficient documentary evidences in support of his claim. It can be seen from the above that sufficient opportunity and time has been given to the assessee and in spite of which the assessee has chosen not to file the detailed in respect of the aforesaid items, and accordingly, I am constrained to disallow the same ….”

10. Deliberating upon the facts and circumstances of the case under consideration, we are of the opinion that the assessee had failed to prove the claim made by him in the return of income so, the AO was justified in levying penalty on him u/s. 271(1)(c) of the Act and that CIT(A) was also justified in upholding the same. We are also of the opinion that amount in question was part of the income of the assessee and that the particulars filed by the assessee, with regard to purchase of assets claimed to have been used for R&D purposes, were inaccurate. Before proceeding further we would like to mention a few prepositions propounded by the courts with regard to ‘concealment penalty’. Same can be summarised as under :

– In economic offences, the statutory liability to pay tax is nothing but a strict liability where the question of proving beyond the shadow of doubt the existence of one’s bona fide belief that such income is not taxable does not arise. The rule of mens rea has to be established beyond all reasonable doubt in criminal cases, but not in a case of an economic offence.

– The Explanations appended to Sec. 271(1)(c) of the Act, indicate the element of liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The object behind the enactment of Sec. 271(1)(c) read with the Explanations indicates that the section has been enacted to provide for a remedy for loss of revenue. As the penalty u/s. 271(1)(c) is a civil liability, so, wilful concealment is not an essential ingredient for attracting it as is the case in the matter of prosecution under section 276C.

– Section 271(1)(c) of the Act is about imposing penalty for furnishing inaccurate particulars or concealing particulars of income. For levying penalty u/s. 271(1) (c) two facts should co-exit-first that amount in question is part and parcel of the income of the assessee. Secondly, the assessee has filed inaccurate particulars or has concealed particulars of such income.

– Section 271(1)(c) has to be strictly applied in the larger interest of discipline in filing correct returns by the assessees.

– Tax-exemptions, tax-concessions, tax-rebates and tax-deduction find place in the tax-laws for the assesses who make bona fide claims, and not for those who make false declaration for the purpose of benefit in terms of the statute. So, making a false declaration with regard to exemption/concession/deduction is a prima facie proof of furnishing of inaccurate particulars

– Non-disclosure of receipt/showing lower receipt of income in return is a prima facie evidence of concealing particulars of income.

– Once the amount claimed to be gift is discovered to be bogus, penalty for furnishing inaccurate particulars can be levied.

– When a revised return is filed after detection of concealed income and such return shows higher income, imposition of penalty for concealment or filing inaccurate particulars is considered to be proper.

– Making a bogus claims of an expenditure/allowance is considered filing inaccurate particulars resulting in imposition of penalty u/s. 271(1)(c).

– Withdrawal of a bogus claim for depreciation on non-existing assets in a revised return after search and seizure action is considered to be furnishing of inaccurate particulars.

11. In our humble opinion bogus claim and debatable claim are two different concepts. When an unreal thing or untrue fact is projected or presented as true or genuine same is termed to bogus. Courts are unanimous that for a debatable claim assessee cannot be penalised, but when he make a bogus claim levy of penalty is justified. A claim without supporting evidences like a body without life. Assessee is expected, rather required, not only produces evidence, but to produce positive evidence in respect of a claim made. Onus of proving a claim is always on the assessee and he has to be discharge it fully. In other words, claim of any expenditure has to be proved by the assessee with corroborative evidence. Mere making of a claim is not sufficient. Entries in the books of accounts or auditors reports or Board of Directors Meeting cannot be take place of a piece of genuine evidence. If assessee fails to produce the same, his claim also fails. In the case under consideration, the assessee has failed miserably to substantiate and support claim made by it.

12. So, upholding the Order of the CIT(A), we dismiss the appeal filed by the assessee. A tainted transaction has been projected as genuine in the case under consideration. In our humble opinion, if a claim is made without any basis and that results in depriving the Sovereign of its due share of tax, it deserves to be treated differently from a claim where citizens and State have divergent view about the allowability of the said claim. In first category, there is only a claim without any substance, whereas in second category a claim supported by documentary evidence is always there, but AO and assessee have difference of opinion as what treatment should be given to it. Besides, in such cases there is no doubt about expenditure incurred i.e. genuineness of incurring the expenditure. Thus, such transactions do not suffer from any deficiency as far as factum of ‘going out’ of sum is concerned. But in the case under consideration basic fact of spending of money for purchasing items for R&D purposes itself missing. As a result, penalty levied for filing inaccurate particulars and thus concealing the particular of income is confirmed.